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2017 was a dismal year for AT&T (NYSE:T) investors, who watched their stock drop 14% as the S&P 500 rallied 17%. The stock was weighed down by four straight quarters of year-over-year revenue declines and ongoing losses in video subscribers.
Analysts expect AT&T to finish fiscal 2017 with a 2% sales decline and 3% earnings growth. For 2018, both figures are expected to stay roughly flat. This doesn’t make AT&T look like an exciting investment for the foreseeable future, but investors shouldn’t overlook the four big moves that it will likely make next year.
1. Closing its acquisition of Time Warner
AT&T is already America’s second largest wireless carrier, top wireline services provider, and biggest pay TV provider thanks to its purchase of DirecTV in 2015. If it closes its planned $85 billion takeover of Time Warner (NYSE:TWX), it will also become one of the biggest media companies in the world.
The merger would introduce major bundling opportunities between its wireline, wireless, video streaming, and pay TV businesses. Those bundles could help AT&T counter cord cutters at its pay TV business, widen its moat against Netflix, and lock in more wireless customers.
AT&T claims that the acquisition would become accretive to its adjusted earnings and free cash flow within the first year. However, the US Department of Justice recently sued to block the merger, on the grounds that it would create an anti-competitive ecosystem which would limit consumer choices and hurt streaming video providers.
AT&T’s top priority for 2018 will be to clear these regulatory hurdles and seal the deal. If it fails to do so, its stock could stumble.
2. Investing in 5G networks
AT&T will also invest heavily in new towers to expand its pre-5G and 5G network capabilities across the 700 MHz, AWS-3, and WCS spectrums. Earlier this year, Barclays estimated that AT&T would deploy equipment on up to 50,000 towers, and build about 2,000 more new towers to upgrade its infrastructure and launch the FirstNet public safety network.
AT&T also recently teamed up with Verizon (NYSE:VZ) in a joint partnership with Tillman Infrastructure to build hundreds of new towers. Verizon has also been aggressively expanding its fiber assets — via its purchases of Straight Path and XO Communications for nearly $5 billion — ahead of its 5G fixed broadband rollout next year.
3. Divesting more assets
AT&T’s acquisitions of spectrum licenses, DirecTV, and Time Warner are causing its debt levels to skyrocket. Its long-term debt hit $154.7 billion last quarter, up from $113.7 billion at the end of 2016. If the Time Warner deal closes, that figure could rise above $180 billion.
AT&T has already been selling various non-core assets — including certain cell towers, wireline operations, and data centers — to extinguish some debt. But AT&T will likely need to sell more assets to further reduce that figure.
Two possible divestments include its Digital Life home security business, which could net $1 billion in a sale, and its Latin American pay TV assets (excluding Mexico), which could be sold for $8 billion. It might also consider selling CNN to gain regulatory approval for the Time Warner deal.
4. Establishing more non-mobile connections
AT&T added three million wireless subscriptions (2.3 million in the US and nearly 700,000 in Mexico) last quarter. However, a growing number of those new subscriptions aren’t for smartphones — they’re used to link tablets, wearables, drones, and connected cars to the internet with stand-alone connections.
AT&T stated that it connected almost 100,000 vehicles last quarter, and that the auto market represented a “real opportunity” as infotainment and navigation devices rely more heavily on constant connections. AT&T’s growth across these markets could diversify its business away from the saturated smartphone market.
The bottom line
AT&T, like many of its telco rivals, will try to expand its digital ecosystem, upgrade its infrastructure, reach new wireless markets, and reduce its debt in 2018. That’s a tough balancing act to pull off.
However, AT&T’s stock remains cheap at 13 times forward earnings, and it pays a hefty forward dividend yield of 5.3%. Therefore, investors looking for a cheap income play could consider buying this beaten-down stock — as long they don’t expect a big rebound over the next few quarters.
Leo Sun owns shares of AT&T and Verizon Communications. The Motley Fool owns shares of and recommends Netflix and Verizon Communications. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.